Session I Me 10

8/8/2019 Session I Me 10

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Introduction to Micro-Economics

Session I



What is Economics Economics is a science which deals wit h t he unlimited wants

and limited resources. Making choices in t he f ace of scarcity. If t hings were not limited,

t here wou

ld not

have been subject

like economics

Limited resources imply scarcity and unlimited wants lead to t heproblem of choice.

Scarcity implies t hat, at any given point of time, an individual,organisation or a country can not have everyt hing in anyquantity t hat is desired.

So t he problem of economics is to make a choice efficient ly sot hat use of resources is minimised and t he satisf action ismaximised.



Contd Economic system allocates scarce

resources across t he competing uses,combining and processing t heseresources to produce goods andservices. It determines what to

produce, how much to produce. It arranges for distribution of goods.,provides for future growt h.



Contd Allocation problems, scarcity, choice

Proper combination

how muc

hforeach category

Distribution who should get?

Growt h

different engines of growt h



Production Possibility curve



Production Possibility Curve At any given point of time, t he

resources available to an economy

size of working population, land,building, machinery are all given. So if more resources are used for one sector,less will be available for t he ot hersectors. So a combination of goods andservices has to be decided for aneconomy.



Production Possibility Frontier It is based on t he

f amous gun-butterparadox

Concepts of scarcity,choice and efficiencycan be well understoodwit h t he help of PPF

In PPF, guns represent milit ary goods andbutter representscivilian goods.

PPF slopes downwardswhich ref lects scarcityof resources. To get more guns, society hasto sacrifice butter

PPF is concave to t heorigin indicating t heincreasing relative cost of transferringresources from onesector to anot her.



Production Possibility Frontier Wit h given resources,

country can produceeit her more of butter orof guns.(B or C)

Pt. A indicatesinefficiency

Pt. E is unatt ainable

wit h t he givenresources

Movement from ppf0 toppf1 indicatesexpansion of resources



Application of PPC Central problems of economy what, how, for whom During 2002-03 India produced 23.2 million tonnes of pot ato.

This was part ly inf luenced by how much land is used to raise a particular crop, which is a consequence of govt policy andindividual s choice

What met hod to be used is also a problem of choice. Electricitycan be produced wit h hydro, coal or nuclear power. Agriculturecan be done by labour intensive or capit al intensive met hod.

Who earns how much is also a choice problem for t he economy.Computer engineers earn more t han t he historians, teachers in

US earn more t han t he teachers in India. This is an issue relatedto t he distribution of wealt h and income in t he economy.



How to solve basic economic

problems?



Basic economic systems In market economy, 3 fundament al

problems are solved by market. Theforces of demand and supply determinewhat, how much and for whom toproduce

In centrally planned economic system,t hese problems are solved by t he st ateor government.



Approaches to t he study of

Economics Micro economics refers to t he analysis of

scarcity and choices problem f aced by single

economic unit such as firm, producer,industry. It assumes t he t hings to be const ant ot her t han t he part of a system under study.

Macro economics deals wit h t he behaviour

of aggreg

ates suc

h as Gross DomesticProduct, employment and inf lation rate. It

focuses on t he form and functioning of t heeconomy as an aggregate system



Distinction between micro and

macro economicsMicroeconomics

Deals wit h choices of

individu

als

Aggregates arising out of individual choices areconsidered Eg. tot al demand for oranges

Relative prices play improle response of consumers & producersto change in relativeprices is considered

Macroeconomics

Deals wit h economicaggreg

ates

Aggregate of heterogeneous goods isconsidered GrossNational Product

Aggregate prices areimport ant like pricelevel which combinesprices of heterogeneousgoods



Subject matter Microeconomics

product pricing t heoryof demand

f actor pricing t heory

of distribution

economic welf are

Macroeconomics

unemployment inf lation

poverty

depression

underdevelopment



Why should a manager study

economics? To get a technical help in making optimal and

rational economic decisions

Profit decisions of a

firm can be e

valuated t

hroug

h economic t heory

Profits are functionally related to sales and revenuewhich in turn depend on demand

Demand decisions are followed by production and

supply. Price-supply decisions depend on t he market

structure

Thus,various types of economic decisions t akenby a manager can be evaluated t hrough

microeconomic analysis.



Contd.. Bot h t he markets work on t he basis of pricing

system. So t he Price t heory is import ant

subject matter of MiE. Role of Govt.- govt affects circular f low by

purchasing and producing t he goods forpublic consumption (education, defence, etc).

Through t axes it can redistribute t he income. Also consumption of some of t he goods canbe inf luenced t hru commodity t ax.



Exercise IClassify t he following as topics of micro or

macro

A firm s decision

about

how muc

hincome tosave

Effect of govt regulation on auto emission Impact of higher national savings on

economic growt h Firm s policy of hiring and firing workers National policy on Minimum wages Globalization for raising economic growt h rate





Demand analysis In 1973, OPEC collectively curt ailed t he production of

oil drastically. The supply of oil in t he world fell somuch t hat t he price of oil increased by t hree times.The world economic scenario has changed drasticallysince t hen.

Mr. X was t hinking of selling two 100 yard plots in hishometown to finance his son s education in US(costing 20 lakhs). Suddenly some software f actoriesmoved in and t he govt began to develop t he place as IT Park. The land prices went up. Mr. X had to sell only one plot.



Contd.. A successful manager underst ands how

market forces create bot h opportunities andconstraints for profit able decision-making. If t hey underst and how t he markets work, t heywill also be able to predict t he prices andproduction levels of goods, resources andservices for t heir business.

Demand supply analysis is a powerful tool foranalysing t he way t he market forcesdetermine prices and production in t hecompetitive market.



Demand implies 2 t hings

willingness to purc

hase t

hat commodity

ability to pay t he price of commodity



Determinants of demand Price of a commodity (Px)

Prices of a

rela

ted goods (Py)

Income of a consumer (Y )

Tastes and preferences (T)

Advertising expenditure (A) Expect ations about t he future

movement of price of a commodity (Pe)

Documents

Session I Me 10